Big spending cuts vs. tax reform: Can Congress do both?

Democrats and Republicans agree that today's tax system hinders job growth. But tax reform efforts come as many House Republicans also push for $2.5 trillion in spending cuts in next decade.

Alex Brandon/AP/File
Rep. Dave Camp (c.), shown here at a mock swearing-in ceremony on Capitol Hill in Washington Jan. 5, has called the US tax code a 'complex mess.'

The US tax code, it appears, has no friends.

At a congressional hearing Thursday, members of both parties joined in calling the current system burdensome, unfair, and a hindrance to job creation. So did five expert witnesses.

The hearing underscored the reasons the tax code is suddenly a focus of bipartisan discussion – an issue that both Democrats and Republicans see as a priority for the economy. A fundamental overhaul of the tax code for the first time since 1986 no longer seems out of the realm of possibility.

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But a big hurdle also emerged Thursday, as the two parties staked out different ground on solutions.

Where Democrats at the hearing called for a "deficit neutral" approach to tax reform (in which Congress commits that tax changes won't add to federal deficits), Republicans shied away from that commitment. The GOP instead emphasizes the potential economic benefits of tax cuts and worries that Democrats' approach signals a bid for tax-revenue hikes rather than spending cuts.

Some want to wield a big ax

In a separate move Thursday, a large bloc within the House Republican caucus – including many members affiliated with the tea party movement – signaled their alternative brand of fiscal discipline. They called for massive cuts in federal spending.

The so-called Republican Study Committee, which represents two-thirds of House Republicans, hopes to slash $2.5 trillion from spending over the next decade, with cuts occurring in discretionary areas of the budget rather than on mandatory programs like Medicare and Social Security. That's more a more ambitious goal than congressional Republican leaders have embraced so far.

The gambit isn't directly a tax-reform proposal, but it reveals the fiscal-policy gap between the parties, which was also visible in the recent deliberations of a bipartisan fiscal commission created by President Obama.

On the tax code itself, Republicans want a flatter tax code with fewer tax brackets, or even just one. Democrats want a more progressive tax code in which higher earners pay at a higher rates.

Potentially, the two sides could agree on a middle-ground plan that makes the tax code simpler, with lower tax rates for individuals and corporations but fewer deductions and credits.

In her prepared testimony at the hearing, Nina Olson, the official US taxpayer advocate, suggested that the odds of a deal on tax reform would be improved if the overhaul is crafted on a revenue-neutral basis for the government. In other words, the tax code would be simplified with no affect on the amount of tax revenue that comes in.

'A complex mess'

"Our code is a complex mess," Rep. Dave Camp (R) of Michigan, chairman of the House Ways and Means Committee, said at the hearing, which was the first in a series on the topic.

"President Ronald Reagan and Speaker Tip O’Neill ... successfully reformed our tax code in 1986. The time is ripe for us to follow in their footsteps," said House minority whip Steny Hoyer (D) of Maryland, in a opinion piece published Thursday by Politico.

Ms. Olson put some hard numbers on what that "complex mess" means. "A simpler, more transparent tax code will substantially reduce the estimated 6.1 billion hours and $163 billion that taxpayers spend on return preparation," she said in her prepared statement.

Of course, the easy part is saying the current system is broken. The hard part will be reaching a deal that can gain the support of the Republican-controlled House, a Senate where neither party has the ability to move bills to the floor without some support from the other, and President Obama.

With both parties starting to think about 2012 election campaigns, one risk is that talks could devolve into finger-pointing rather than compromise. Moreover, as much as lawmakers profess a desire for tax reform, they've historically raked in lobbyist contributions by wrangling over bills that end up adding new tax provisions, not streamlining Form 1040.

Incentives for reform

At the same time, both parties have some reasons to work for a deal. Cutting tax rates could make America a more attractive place to do business. Finding compromise could help boost approval ratings for Mr. Obama and Congress. And Republicans might be able to nudge the tax system in a direction they like, perhaps for years to come.

Olson said complexity makes the code more costly for the IRS to administer, makes it harder for taxpayers to file, and makes it more likely that tax evasion will occur.

"I am confident that leaders in both parties can find a way to work toward a plan that accomplishes [bipartisan goals]: close loopholes and reduce rates across the board while maintaining progressivity," Mr. Hoyer said in his opinion article.

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